TALF is an acronym for the U.S. government’s Term Asset-Backed Securities Loan Facility program, which basically provides private investors with loans to buy up newly-issued, triple-A rated asset-backed securities (credit card loans, auto loans, student loans, small biz loans, etc). The goal was to free up consumer spending, and to include between $3 billion and $4 billion of eligible secutities.
BlackRock raised “over 200 million” for its first TALF fund in March and April, and used it to purchase around $575 million in securities (preferred return threshold of 10%).
TALF is scheduled to close at year-end (although some of the promised loans are good for three years), but has recently broadened to include legacy consumer ABS, legacy commercial mortgage-backed securities (CMBS) and newly-issued CMBS.
BlackRock refers to this expansion as TALF 2.0, and believes its new fund could take advantage of the increased opportunity. Moreover, BlackRock also suggests that the could be a TALF 3.0 (or perhaps TALF 2.5), which would add residential mortgage-backed securities (RMBS) into the mix.
In its marketing materials, the firm writes:
BlackRock believes leverage available through PPIP and TALF will likely have an ongoing positive effect on pricing in the non-agency RMBS and CMBS sectors, and thereby potentially generate attractive risk-adjusted returns for investors in these sectors:
- Many securities offer unlevered yields of 8-15% even after projecting reasonable loss rates
- If non-agency securitization restarts (as has been the case with ABS), this would have a significant positive impact on non-agency cash flows by making refinancing more available for residential and commercial borrowers.
- A revival of the CMBS market due to PPIP and TALF would have a signficant impact on fundamentals of these cash flows, as it would reopen commercial real estate financing markets and reduce balloon default risk and loss severities.
- Rating agencies have completed a majority of their RMBS downgrafes and are willing to participate in creation of re-REMICs to mitigate regulatory capital charges and increased investor demand.
- We believe with success of government programs such as PPIP and TALF will result in spread tightening, which will positively impact investor returns by increasing refinancings and therefore increase cash flows.
BlackRock hopes to hold a first close “as soon as practicable,” with secondary closings possible during the subsequent 90 days. The fund’s terms include a 0.75% management fee, a 20% carry and a 10% preferred return.